Hungary Placed Under Negative Credit Rating Watch

Two of the big three global credit rating agencies, Fitch Ratings and Standard and Poor’s, placed Hungary’s credit rating on “negative surveillance” over the weekend, citing the risk of contagion from the eurozone and the nation’s increasingly unpredictable policy decisions as the primary factors behind their decision.

Fitch was the first credit ratings agency to act last Friday, announcing that it had downgraded Hungary’s rating outlook from ‘Stable’ to ‘Negative’. This meant that while Hungary’s credit rating status remained at ‘BBB-‘, one level above junk status, there was a distinct possibility that a downgrade may happen soon unless the government could meetits budget gap targets, “particularly in the context of significant structural reforms and declining external debt ratios.”

"The revision ... reflects a sharp deterioration in the external growth and financing environment facing Hungary's small, open and relatively heavily indebted economy," said the ratings agency in a statement cited by AFP.

"Moreover, various fiscal policy measures and the scheme to allow the repayment of household foreign currency mortgages at below market exchange rates have dented foreign investor confidence, on which medium-term growth prospects depend," it added.

Fitch’s actions was followed a day later by S&P, which warned that it could reduce the nation’s sovereign credit grade to junk by the end of the month, after placing the nation under its “CreditWatch with negative implications.”

S&P blamed its negative outlook on Hungary’s economic and political scene, which had become “unpredictable because of the weakening of monitoring agencies and a number of decisions on budget receipts that will negatively affect Hungarian growth and state finances."

"Because of the rising risks that affect Hungary's financial credibility and the worsening external financial and economic environment S&P has put the Hungarian BBB- debt on negative surveillance," said the agency.

Hungary’s centre-right government though have been stunned by the rating agencies’ decision and have described any potential downgrade as highly unjustified.

"Based on the economic policy of the country, the government's policies and budget figures, there's no realistic reason for a downgrade," said Hungary Prime Minister’s spokesman Peter Szijjarto, in an email quoted by the Wall Street Journal.

"Just two days ago the European Commission declared that the Hungarian budget deficit will be below 3 percent, which only seven European Union member states will be able to show next year," claimed Szijjarto.

Hungarian Prime Minister Viktor Orban shocked the markets last year after rejecting renewed funds from the International Monetary Fund in order to have the freedom to pursue more “unorthodox” policies aimed at cutting Hungary’s debt level while ending years of austerity measures imposed on the country.

The steps included raising revenue by effectively nationalizing $14 billion of assets held by private-pension funds, levying extraordinary taxes on the banking, energy, retail and telecommunication industries and forcing banks to swallow exchange-rate losses on foreign-currency mortgages.

“These measures will constrain growth prospects and may put the government’s fiscal targets in jeopardy and could prevent a sustained reduction in general government debt levels,” argued S&P in a statement cited by Bloomberg BusinessWeek. “The risks are further amplified by what we consider to be weakening institutional effectiveness, which has been undermined by changes to the constitution and the functioning of some independent institutions.”

The Hungarian government though have claimed that these steps were necessary in reducing the nation’s debt, which stood at 81 percent of GDP last year, and reducing its budget deficit to 2.5 percent of GDP, which is below the EU’s 3 percent limit.

Chancellor of the Exchequer of the United Kingdom from 1992 to 2007. Prime Minister of the UK between 2007 and 2010. Inaugural 'Distinguished Leader in Residence' at New York University. Advisor at World Economic Forum

Asia Pathways is a blog of the Asian Development Bank Institute (ADBI). ADBI welcomes contributions to Asia Pathways. Information on how to contribute to the blog is available at our guidelines for authors.

Located in Tokyo, Japan, ADBI is the think tank of the Asian Development Bank. Its mission is to identify effective development strategies and improve development management in ADB's developing members countries. ADBI has an extensive network of partners in the Asia and Pacific region and beyond. ADBI's activities are guided by its three strategic priority themes of inclusive and sustainable growth, regional cooperation and integration, and governance for policies and institutions.

QFINANCE is a unique collaboration of more than 300 of the world’s leading practitioners and visionaries in finance and financial management, covering key aspects of finance including risk and cash-flow management, operations, macro issues, regulation, auditing, and raising capital.